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Creatively managing for creative destruction
Creatively Managing for Creative Destruction William L. Shanklin
n 1939, the r e n o w n e d economist J o s e p h Schumpeter used the o x y m o r o n "creative destruction" to describe h o w the standard of living is continually elevated in free-market economies. The profit motive encourages entrepreneurial activity, which replaces existing technologies and processes with innovations. A century ago, a tidal wave of economic disruption was under way that propelled industrialized nations out of the agrarian age. It was set in motion by the inventions of such giants as Thomas Edison and Alexander Graham Bell, the ingenuity of such engineers as Henry Ford and Frederick Taylor, and the analytical mind of Alfred P. Sloan, who at General Motors organized the means for managing labor, materials, and m o n e y on a grand scale. Today, at the dawn of the n e w millennium, a digital tsunami is wreaking havoc on "business as usual." The devastation has engendered consternation and confusion in many of the corner ofrices and boardrooms at venerable F o r t u n e 500 corporations and elsewhere. Executives have watched as upstarts with meager revenues, negative earnings, and negligible investments in hard assets saw their stocks z o o m to market valuations surpassing those of long-established, blue-ribbon companies. Youthful dotcom entrepreneurs, w h o never spent a day working in a conventional corporation, are chased after by eager venture capitalists and find their names on the lists of most affluent citizens. Applied at the micro level of the corporation rather than an entire economy, creative destruction goes by the unsavory name "product-line cannibalism." In the new e c o n o m y ushered in by the communication revolution, the concept that has taken on the weight of a strategic maxim is: "You had better cannibalize your o w n products and services before s o m e o n e else does." Yet this idea of "You have no choice but to attack your own assets" is a guideline, not a hard-
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Creatively Managinja for Creative Destruction
and-fast rule. It is certainly true for proactive technology companies like Intel that purposely occasion their o w n inflection points in order to k e e p competition off-guard by practicing product-line cannibalism. Gordon Moore, t,.,*t~ kt'xi~'r~"J I I ~ t'~ L,,| Intel's cofounder, articulated the scientific basis for the firm's strategy of doubling microprocessing capacity every 18 months. Intel has smothered its opposition by periodically bringing to market a new generation of semiconductor that renders competing chips obsolete, including its own. By contrast, executives in companies imperiled by new technologies, particularly so-called "old economy" firms, often have another option--creative leveraging--that should be examined before they either give up or plunge headlong into supplanting their existing product lines. Panicky thinking--"Oh no, we're d o o m e d ! " - - m a y be dead wrong. Remember w h e n the p a p e r companies were thought to be in the throes of a d o w n w a r d spiral because personal computers would lead to paperless offices? Creative leveraging looks for ways to rescue and enhance endangered businesses through the application of new technologies. In other words, creative leveraging is a strategy for avoiding evisceration by the forces of creative destruction.
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Creative D e s t r u c t i o n Obliterates t h e State o f t h e Art
In the zero-sum game of creative destruction, a c o m p a n y offering a better mousetrap takes share away from products already on the market. Blackand-white television gave way to color, typewriters to computers, and dot matrix printers to lasers. 29
One-hour p h o t o services and digital p h o t o g r a p h y have negated m u c h of the uniqueness of a Polaroid camera. Digital cameras promise to be outselling film cameras in North America and Japan by 2002, and digital p h o t o g r a p h y should be in control of the vast majority of the world market no later than 2010. Polaroid and Kodak have no rational choice but to m a k e their o w n film technology obsolete if they are to survive the challenge from determined digital firms like Sanyo and Sony. Intel CEO Andrew Grove's 1996 book, Only the Paranoid Survive, warns that only scared and insecure market leaders maintain their preeminence. In reality, of course, it is not paranoia at all---competitors really are out to lure one's customers. Grove's notion of a "strategic inflection point" refers to the time w h e n a fundamental groundshift occurs in the business environment. A crisis point can be precipitated by a change in technology, competition, regulation, or other progenitor. Whenever a c o m p a n y encounters a strategic inflection point, it can be skewered---or adapt and emerge stronger than ever. A characteristic of a strategic inflection point is that industry insiders are initially bewildered; they k n o w their business model is not working as well as it once did, but they are not sure why. The S-curve illustration ( F i g u r e 1) depicts the process of technological displacement that was first advanced by Richard Foster (1986) of McKinsey & Company. In his words, S-curves show "the relationship b e t w e e n the effort put into improving a product or process and the resuits one gets back for that investment." The Scurve illustrates h o w a new technology is commercialized and gradually accepted by the market. For a while it has the marketplace to itself, until a competing technology is introduced. The two technologies coexist for a period of Figure 1 time before the older Creative Destruction at Work: one reaches its perforTechnology Life Cycles mance limits and can no longer compete. At that point the n e w technology has the market to itself, until it too is challenged. Once a c o m p a n y C has a product or technology ready to commercialize, the timing j~hnology B issue is instrumental. Just because the product is ready to bring to market does not J TeCnheT°/;gYeffoArt m e a n it should be. The three considerInvestment and Time ations that dictate
•j•chnology
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timing of the introduction are competition, customers, and profitability. As long as imitators have not brought clones to market, the technological leader can maintain its margins on its current product line. However, once lower-price clones begin to appear and take business away, the leader's profit margins will come under severe pressure. To strike a blow at the imitators, the leader then can attempt to commercialize the n e w technology and again establish a temporary m o n o p o l y position. Whether the leader is successful or not depends on customers' readiness to accept the n e w technology. In the early days of word processing, buyers were quick to adopt successive generations of software because the upgrades were so much easier to use. Later, as the industry matured, it became increasingly difficult to convince clientele that, say, Windows 98 was worth trading up to from Windows 95. On the other hand, a significant improvement, such as reliable voiceactivated word-processing software, would precipitate a massive wave of buying.
Creative Leveraging Co-Opts New Technology Executives in companies whose products are threatened by n e w technologies typically adopt one of two viewpoints, both of which invite trouble. They m a y be dismissive toward the rival and deny its potential. Reflect on the mimeograph firms that were not interested in what Chester Carlson, a patent lawyer and inventor, had to offer. His electrostatic process, eventually k n o w n as "xeroxing," b e c a m e to copying what the Gutenberg press was to printing. Incipient technologies are usually crude and do not work very well, which breeds complacency in the companies whose technologies contemporaneously rule the marketplace. The opposite reaction is for executives to see the worst in the situation and despair that all is lost and that the n e w technology will inevitably take over. In some instances, this "Chicken Little" conclusion, "The sky is falling," is well founded, such as with ice boxes, v a c u u m tubes, and propeller planes. However, displacement may not transpire at all. UPS and Federal Express were s u p p o s e d to be irreparably d a m a g e d by fax machines, electronic mail, and the lnternet. These inventions could all reduce time and distance to the click of an electronic mouse, delivering urgent messages forthwith, not the next day. Instead, online retailing b u o y e d the package delivery business. FedEx and UPS have b e e n so revitalized by the e-commerce b o o m that Wall Street has b e e n recommending them as inexpensive backdoor Internet plays. An investor can buy the stock of one of these proven firms, whose services and producBusiness Horizons / November-December 2000
tivity are dramatically a u g m e n t e d by the application of Internet technology, without incurring the risks of directly buying shares in a dotcom. Before executives in ostensibly at-risk companies give up and conclude that the n e w technology "will wipe us out," the strategic question to address is: "How can we leverage or co-opt the n e w technology to reinvent our business?" Dire predictions were made over the years for movie theaters, first with the white-hot diffusion of commercial television in the 1950s and afterwards with the immense popularity of videocassette recorders in the 1980s. Theater attendance and box-office revenues were indeed heavily d a m a g e d in the early days of television. Between 1950 and 1960, the percentage of homes owning a television set soared from 10 percent to 87 percent, while theater attendance p l u m m e t e d from more than 3 billion admissions to 1.3 billion. Gross receipts from box office sales declined from almost $1.4 billion to $984 million. Throughout the 1960s, movie attendance maintained a descending trajectory. By 1980, the n u m b e r of admissions had reversed course, although the 1980 total was still 66 percent below the attendance level for 1950. After 30-some years of television, Americans' fascination with it had subsided and people were again venturing outside their homes for entertainment. What's more, the motion picture industry, which had b e e n a m o n o p o l y in the days before television. had b e c o m e proficient in battling for business. As a result, between 1970 and 1999, movie theater attendance increased by 59 percent and box-office receipts more than quintupled. Unlike the early days of television, technical innovations such as VCRs, personal computers, and the Internet have had a catalytic effect on the entire movie industry. Theaters have b e e n able to enhance their admissions and revenues despite, as well as because of, new technologies. During the 1990s, U.S. box office revenues at theaters grew by almost 50 percent, theater attendance reached the highest level in 40-plus years, admissions per capita rose from 4.8 to 5.4, and the total n u m b e r of theater screens grew from 23,689 to 37,185. Sales of prerecorded rental videocassettes to dealers more than doubled and the industry boosted the n u m b e r of films it released annually by nearly 15 percent. The n u m b e r of people working in movie theaters increased by 28.6 percent and jobs in movie production grew by 79.6 percent. Employment in all sectors of the motion picture industry rose by more than 47 percent. History teaches that huge fortunes can originate from new technology, but application is at least as enriching, especially after a technology b e c o m e s a commodity. Henry Ford did not invent automobiles, but his mass-production technique made them affordable for the middle class. Creatively Managing for Creative Destruction
In the budding years of radio and television, RCA and NBC trailblazer David Sarnoff was infatuated with broadcasting technology, while CBS pioneer William Paley was more interested in content. Paley was right--a Milton Berle or a "Buffalo Bob" could provide a reason for people to watch and listen and develop viewer loyalty to a particular network. Currently there is a similar dichotomy between companies focusing on the technological aspects of communications and those supplying content, and the content providers occupy the more valuable long-term competitive position. Companies controlling the m o d u s operandi for communicating, such as cable-television lines and telephone access, are in an increasingly commodity-like business, whereas the most creative content providers have distinguishable attributes that separate them from the pack. To illustrate, in May 2000, w h e n Time Warner blacked out Disney-owned ABC stations from its cable television system over a contractual dispute, a hue and cry went up from viewers about missing the show "Who Wants to Be a Millionaire?" Ostensibly, cable television, telephone, and Internet services are competitors in terms of distributing content to consumers. They can also be viewed as complementary, which was the underlying strategy in the merger between America OnLine and Time Warner. The resulting communications giant will be able to supply customers with a bundled package encompassing cable TV, local and long-distance telephone service, and Internet access and content--all on one monthly bill. Seemingly substitute products or services are being merged to form a more attractive hybrid. Horse racing once vied with baseball as the most attended spectator sport in the United States. For years racing had a m o n o p o l y on legalized wagering, with the well-recognized exceptions of casinos in Las Vegas, greyhound racing, and jai alai in Florida. As almost the only legal play around, racetracks grew stodgy and unresponsive to their customers. When casino and riverboat gaming spread like wildfire across North America and state lotteries proliferated, racetracks were not honed to fight back. On-track attendance was also eroded by the legalization in numerous states of off-track betting (OTB) at a licensed facility, such as in a shopping center or a Vegas casino. Moreover, racetracks themselves instituted simulcasting, which refers to the practice of exchanging live telecasts of races a m o n g tracks. In simulcasting, the m o n e y wagered from all the tracks is commingled into a pool and the track originating a signal is c o m p e n s a t e d by the tracks receiving the signal. Every few minutes and at all times of the day and night, a bettor can play races run at tracks all over the United States as well as in foreign locations as far away as Australia and H o n g Kong. OTB and simulcasting 3
proffer more betting plays, a much wider array of times for busy people to participate, and a rhythm in sync with modern lifestyles. Electronic delivery systems revitalized betting on horse racing, with most tracks receiving 80 percent of their wagers from simulcasting. Technology extended racing's ability to distribute images and information and interact with customers. Recently, fans have been able to sign up to receive the satellite signals of two firms that broadcast racing most of the day and night. Bets can be made by phone using a toll-free number (known as "account wagering"), and past performance information is downloadable from the Net. The premier racetracks in New York, Kentucky, and California were delighted from the outset with what electronic technology could do for them, as their outgoing signals are the most popular imports at smaller tracks and OTB parlors. Initially, however, the lesser-known tracks and racehorse b r e e d e r s - - w h o have immense investments in farms and bloodstock--feared the worst: that the accumulated competition from state lotteries, casino gaming, OTB, simulcasting, and account wagering would lead to a shakeout among racetracks. What remained would be a small number of supertracks, perhaps fewer than ten, conducting live racing and beaming their signals to OTB facilities and homes. The denouement, the thinking went, would be a permanent downsizing in the huge agribusiness known collectively as the racing industry--sales companies, veterinarians, farms, and the like--because there would be a dramatic decline in the number of horses needed to fill the races. None of this eventuated. Technology has become racing's lifeline rather than its executioner. Ironically, this ancient sport has the requisite elements to be a twenty-first century kind of offering. As an action-oriented, information-based intangible, it is made to order for television and the Internet. On-track attendance has declined, but the total wagering handle has increased with each application of newly available electronic conveyance mechanisms. In the decade after simulcasting was implemented in a big way, on-track attendance and wagering on live races declined by 47 and 62.5 percent, respectively, whereas total revenues increased by 16 percent because of widespread betting on televised races. Of late, some major racetracks are even experiencing a
"Electronic enhancements have freshened and revived a centuries-old, zero-technology sport that many observers wrote off as moribund."
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shortage of horses to fill their races. Electronic enhancements have freshened and revived a centuries-old, zero-technology sport that many observers wrote off as moribund. The parallel between the predicament formerly faced by racetracks and the one now being encountered by higher education is remarkable, with distance learning being the equivalent of simulcasting. The fact is, any information-based business whose core content can be reduced to the digits 0 and 1 and directly transferred by any communication device based on a binary system is both vulnerable to new kinds of competition and blessed with expansive possibilities. Higher education is in the beginning stages of a digital revolution that is sure to reduce the need for conventional campuses with walled classrooms, dormitories, cafeterias, s p o t s facilities, and professors. Entirely online private sector schools are now enrolling students because of the convenience of distance learning and better prices-one proprietary university offers an accredited MBA for $11,000. Higher education cannot rely on its conventional business model of recruiting learners to campus. On the contrary, institutions will have to co-opt electronic technology and reach out to groups of students who might not ordinarily attend due to time and distance obstacles. Peter Drucker (20001) sees the biggest demand coming from adult education, declaring that "people who are already highly educated and high achievers increasingly sense that they are not keeping up." Traditional colleges and universities that move quickly to capitalize on the distance-learning trend will augment the size of their student populations, even though on-campus enrollments will likely decline.
Deciding Between Clicks and Bricks Accommodating new technologies does not mean abandoning traditional strategies. A segment of customers will prefer to browse for books in the relaxing ambience of a Border's store, while some will opt for the handiness of Internet ordering, and others will divide their shopping between online and in-house. The question of whether and how to combine electronic resources, or a "clicks" strategy, with a "bricks-and-mortar" strategy is one confronting almost every business and for which there is no pat answer. Dell Computer, Lands' End. and Blue Nile sell exclusively or mostly through catalogs and online, whereas the primary forte of Compaq Computer, Home Depot, and Tiffany & Company is retailing through actual stores. However, one fact has already emerged: It is unlikely that any commercial endeavor can be either fully virtual or solely bricks-and-mortar; Business Horizons / November-December 2000
some investment in both physical assets and electronic c o m m e r c e will be necessary. Online retailer eToys decided to bring its order fulfillment in-house by building its o w n warehouse instead of renewing its contract with Fingerhut Companies. Wal-Mart, the second largest seller of toys behind Toys 'R' Us, is moving in the other direction by becoming more of a virtual retailer. The c o m p a n y ' s thousands of store locations, coupled with its Web site, enable it to blanket the market and achieve even further buying p o w e r vis-a-vis toy manufacturers. Thus Wal-Mart is moving toward clicks as eToys is installing bricks.
Friendly Fire---Turning the Weaponry on Thyself Creatively leverag!ng new technologies to save a c o m p a n y or an industry is not always possible. In some cases--transistors versus vacuum tubes, automobiles versus carriages--it inescapably b e c o m e s a zero-sum game; what one wins, the other loses. Once m a n a g e m e n t determines that creative leveraging is not feasible, that two technologies cannot coexist in the marketplace and one will inevitably replace the other, then an option is to gain a foothold in the superior technology. The question is, how? Companies in entrenched industries generally react with indecision w h e n their product lines are threatened by new technologies. The customary response is to try and save themselves by pouring more m o n e y into the old product lines in a last-ditch effort to improve performance. But most of them also endeavor to gain a foothold in products and services based on new technologies. By ambivalently spreading their resources between the old and the new, they w e a k e n their competitive position. In most cases, the industries come to be dominated by firms from outside, with no ties to the past, whose single-minded attention, time. and m o n e y are focused on innovation. Successful companies are susceptible to what Harvard Business School professor Clayton Christensen calls "the innovator's dilemma." His 1997 b o o k by the same name is full of case studies of outstanding companies that faltered by listening too closely to current customers and concentrating their investments on today's most profitable products. Because current buyers are notoriously p o o r choices for evaluating radically different technologies, companies with a strong customer orientation are susceptible to allowing potential blockbusters to languish. This neglect enables ambitious firms without an allegiance to the status quo to exploit the w i n d o w of opportunity. IBM ceded control of the DOS operating system to Microsoft, claiming, "The hardware is where the value lies." DEC steadfastly claimed that personal computers would be of limited Creatively Managing for Creative Destruction
popularity: "Why would anyone want to have one at home?" A billion-dollar company---call it G o l i a t h - had long controlled a market for industrial equipment. A $3 million firm--David, of c o u r s e - - h a d pioneered machinery based on a much different technology and had m a n a g e d to sell 300 units to one of Goliath's major customers. Showing a bit of concern, Goliath contacted David about buying it out. As part of due diligence, engineers from Goliath did an in-depth technical evaluation of David's equipment, even though Goliath's CEO had previously told his counterpart at David that these engineers referred to the new technology as "the enemy." Not surprisingly, given their fidelity to their o w n technology, the tendentious engineers found an assortment of reasons why David's machinery was deficient. So Goliath broke off negotiations. Since then, backed with venture capital, David has b e e n making steady inroads and is headed toward having the dominant technology. "Not invented here" inculcates a bias that makes it difficult for anyone to realize that s o m e o n e else has found a better way, until it is too late to act. Kodak too has discovered it is psychologically and practically difficult for m a n a g e m e n t to take actions that amount to slaying the goose that laid the golden egg. The comp a n y has tried to hedge its bets by cultivating its film business and pursuing digital imaging. Its stock has b e e n a mediocre performer in a raging bull market, and several CEOs have failed to turn the c o m p a n y around. Even w h e n George Fisher was brought in from Motorola as the first outsider to head Kodak, the corporation remained rooted in the film culture that made it a household name, and Fisher departed with his task undone. Full-service stock brokerage firms like Merrill-Lynch are working to stave off the inroads made by low-cost e-brokers, but one wonders whether the Merrill-Lynch philosophy can coexist with the bare-bones mentality of the e-traders. Precedent would say no, that compromise produces a muddled strategy. Often, an organizational firewall needs to be constructed between the conflicting technologies. An outright divorce may be better yet, owing to the difficulties of blending disparate corporate cultures. Consider several examples. • When Wickes, Inc., a chain of lumberyards, launched Wickes.com, an Internet site that al33
lowed building contractors to get interactive price quotes and consult past purchase records, the conflict b e t w e e n the bricks-and-mortar side of the business and the Internet side b e c a m e so intense that the board of directors ordered a shutd o w n of the Internet effort. The young dotcom technical types w h o had b e e n brought in to start up and run the Internet operation and the older Wickes' m a n a g e m e n t cadre mixed like oil and water. Wiser for the experience, Wickes is n o w making another and apparently more fruitful effort to b e c o m e involved in e-business. • DaimlerChrysler started a venture unit to get the automobile c o m p a n y more involved in the World Wide Web. It immediately encountered a host of problems. The huge and far-flung automobile bureaucracy impedes the speedy action needed to act on Net-related investments. Further, the incentive-laden compensation packages necessary to attract and retain venture employees are quite different from the traditional reward structures in a manufacturing company. Similarly, General Electric has encountered noteworthy turnover in its venture unit that invests in Internet companies. The employees want to be compensated like their peers in venture capital firms, which is at odds with h o w GE pays everyone else. • Whenever possible, the idea is to use Internet technology to strengthen and reinvent an olde c o n o m y business rather than destroy it. However, w h e n the bricks-and-mortar and online c o m p o n e n t s of a business are so obviously substitutes for one another, a complete disjoining m a y be the best strategy. American Greetings k n o w s that online greeting-card purveyors can jeopardize the longtime practice in which customers go to retail outlets to purchase cards for special occasions. Consequently, the firm started an online unit as an entirely separate company, rather than a product line within the parent firm. J.P. Morgan pursued a kindred strategy by spinning off a Net-based risk m a n a g e m e n t company, called Cygnifi, in which it will retain a minority interest. • Arm's-length arrangements enable newtechnology managers to compete with old-technology executives in a no-holds-barred manner that is often unrealistic to expect within the confines of the same corporation. Proponents of the n e w technology n e e d to be free to proceed without regard for harming the old. Besides, by dividing the two organizationally, m a n a g e m e n t can offer investors a "pure play" in the n e w technology. General Motors opted to unlock the true value of its Hughes Electronics Corporation affiliate, a satellite communications unit, by issuing a tracking stock, GMH, w h o s e value depends on Hughes' earnings alone. Investors placed a market capitalization on GMH that exceeded the worth of GM's automobile business. Later, GM 34
spun off Hughes to stockholders, with GM keeping a 35 percent share. • When U.S. defense companies saw their markets shrink because of the fall of the Soviet Union and the Iron Curtain countries of Eastern Europe, m a n y tried to replace lost defense business with commercial endeavors. In general, the results of what is referred to as a "dual use" mission (defense and commercial) were disappointing because the defense firms had very little expertise in doing business with commercial buyers. Northrop G r u m m a n attributed its failed initiatives to a lack of understanding of buyer behavior and distribution channels in nondefense businesses. The Electronics Systems Sector of the Harris Corporation has circumvented these kinds of problems by identifying promising defense technologies for commercial applications, linking up with venture capitalist firms to underwrite startups, and then doing initial public offerings for the successes. Harris typically maintains a minority ownership, usually 20 percent, in the n e w companies.
A Virtual Certainty In the immediate future is a world of converging computers, telecommunications, and consumer electronics. Beyond this simple union lies the promise of a far-reaching development. Microsoft's Bill Gates (1999) sees the next step as universal connectivity, or what he calls "virtual convergence": Everything you want is in one place, but that place is wherever you want it to be .... The result is that there will be a proliferation of smart devices, from palmsized and tablet PCs to Web-enabled phones and AutoPCs. Your files, schedule, address book, and everything else will automatically be replicated onto each of these devices, because everything that can think will link. Smart devices will help the user avoid information overload by supplying only data that are pertinent at a particular time. If you are at your CPA's office, your tax records will be available; if you are at a major-league baseball game, relevant statistics will be front and center. Gates foresees that the combination of digital technology, advanced software, smaller and more powerful microprocessors, and exponential growth in fiber and wireless bandwidth will ultimately provide universal connectivity. A person's whereabouts will be less important than they are today. Virtual convergence will m e a n that digital information is at one's fingertips anytime and anyplace. Take day trading. Twenty-four hours a Business Horizons / November-December 2000
day, seven days a week, and from anywhere, a day trader will be able to access details about securities and initiate orders. Once virtual convergence becomes a reality, the market potential for any intangible such as information will be greatly expanded, and sellers of tangible goods will be able to communicate with and service their customers as never before. Ford, for example, has hired UPS to provide real-time tracking of its cars, via bar codes and the Internet, as they proceed from factories to dealerships. ike the proverbial two-edged sword, the virtual revolution will sound the death knell for some companies and industries while presenting unimaginable growth opportunities Io others. The overriding issue facing upper management in threatened companies is h o w to leverage creative destruction---creatively--to renew commercial offerings that have lost their competitive edge. Executives w h o absolutely cannot find ways must boldly change their own companies if they hope to survive and prosper. Only by zealously replacing passe product lines and outdated processes can they save the c o m p a n y for shareholders. In the vast majority of cases, the place to start is with the establishment of an independent company. As long as conflicting lines of business are within the control of the same corporate structure, the human tendency will be to pull punches rather than administer a knockout blow.
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References
J. Ball, "DaimlerChrysler Hires a Silicon Valley Gadfly to Map Its Web Drive," Wall Street Journal, April 27, 2000. p. B1. D. Blackmon, "In the New Economy, Who Are the Hunters and Who the Hunted?" Wall Street Journal, April 12, 2000, p. A1. C. Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997).
Creatively Managing for Creative Destruction
A. Cooper and D. Schendel, "Strategic Responses to Technological Threats," Business Horizons, February 1976, pp. 61-69. H. Curtis, Pari-Mutuel Indust~.. Slots and Racing--Industry Report (New York: Salomon Smith Barney, 1997). P. Drucker, "Putting More Now Into Knowledge," Forbes, May 15, 2000, pp. 84-88. R. Foster, Innovation: The Attacker's Advantage (New York: Summit Books, 1986). B. Gates, "Everyone, Anytime, Anywhere," Forbes
ASAE October 4, 1999, p. 45. A. Grove, Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company and Career (New York: Bantam Doubleday Dell Publications, 1996). G.C. Hill and L. Landro, "Does Everybody Have to Own Everything?" Wall Street Journal, January 12, 2000, p. B1. Motion Picture Association of America Research Department, MPAA 1999 U.S. Economic Review (Encino, CA: MPAA, 2000). M. Neff and W. Shanklin, "Creative Destruction as a Market Strategy," Research Technology, Management, May-June 1997, pp. 33-40. W. Shanklin, "Revitalization Strategies for Second-Tier Defense Companies," in G. Susman and S. O'Keefe (eds.), The Defense lndustry in the Post-Cold War Era: Corporate Strategies and Policy Perspectives (New ~k~rk: Pergamon, 1998), pp. 189-202.
William L. Shanklin is a professor of mar-
keting and entrepreneurship at Kent State University in Kent, Ohio.
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n 1939, the r e n o w n e d economist J o s e p h Schumpeter used the o x y m o r o n "creative destruction" to describe h o w the standard of living is continually elevated in free-market economies. The profit motive encourages entrepreneurial activity, which replaces existing technologies and processes with innovations. A century ago, a tidal wave of economic disruption was under way that propelled industrialized nations out of the agrarian age. It was set in motion by the inventions of such giants as Thomas Edison and Alexander Graham Bell, the ingenuity of such engineers as Henry Ford and Frederick Taylor, and the analytical mind of Alfred P. Sloan, who at General Motors organized the means for managing labor, materials, and m o n e y on a grand scale. Today, at the dawn of the n e w millennium, a digital tsunami is wreaking havoc on "business as usual." The devastation has engendered consternation and confusion in many of the corner ofrices and boardrooms at venerable F o r t u n e 500 corporations and elsewhere. Executives have watched as upstarts with meager revenues, negative earnings, and negligible investments in hard assets saw their stocks z o o m to market valuations surpassing those of long-established, blue-ribbon companies. Youthful dotcom entrepreneurs, w h o never spent a day working in a conventional corporation, are chased after by eager venture capitalists and find their names on the lists of most affluent citizens. Applied at the micro level of the corporation rather than an entire economy, creative destruction goes by the unsavory name "product-line cannibalism." In the new e c o n o m y ushered in by the communication revolution, the concept that has taken on the weight of a strategic maxim is: "You had better cannibalize your o w n products and services before s o m e o n e else does." Yet this idea of "You have no choice but to attack your own assets" is a guideline, not a hard-
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Creatively Managinja for Creative Destruction
and-fast rule. It is certainly true for proactive technology companies like Intel that purposely occasion their o w n inflection points in order to k e e p competition off-guard by practicing product-line cannibalism. Gordon Moore, t,.,*t~ kt'xi~'r~"J I I ~ t'~ L,,| Intel's cofounder, articulated the scientific basis for the firm's strategy of doubling microprocessing capacity every 18 months. Intel has smothered its opposition by periodically bringing to market a new generation of semiconductor that renders competing chips obsolete, including its own. By contrast, executives in companies imperiled by new technologies, particularly so-called "old economy" firms, often have another option--creative leveraging--that should be examined before they either give up or plunge headlong into supplanting their existing product lines. Panicky thinking--"Oh no, we're d o o m e d ! " - - m a y be dead wrong. Remember w h e n the p a p e r companies were thought to be in the throes of a d o w n w a r d spiral because personal computers would lead to paperless offices? Creative leveraging looks for ways to rescue and enhance endangered businesses through the application of new technologies. In other words, creative leveraging is a strategy for avoiding evisceration by the forces of creative destruction.
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Creative D e s t r u c t i o n Obliterates t h e State o f t h e Art
In the zero-sum game of creative destruction, a c o m p a n y offering a better mousetrap takes share away from products already on the market. Blackand-white television gave way to color, typewriters to computers, and dot matrix printers to lasers. 29
One-hour p h o t o services and digital p h o t o g r a p h y have negated m u c h of the uniqueness of a Polaroid camera. Digital cameras promise to be outselling film cameras in North America and Japan by 2002, and digital p h o t o g r a p h y should be in control of the vast majority of the world market no later than 2010. Polaroid and Kodak have no rational choice but to m a k e their o w n film technology obsolete if they are to survive the challenge from determined digital firms like Sanyo and Sony. Intel CEO Andrew Grove's 1996 book, Only the Paranoid Survive, warns that only scared and insecure market leaders maintain their preeminence. In reality, of course, it is not paranoia at all---competitors really are out to lure one's customers. Grove's notion of a "strategic inflection point" refers to the time w h e n a fundamental groundshift occurs in the business environment. A crisis point can be precipitated by a change in technology, competition, regulation, or other progenitor. Whenever a c o m p a n y encounters a strategic inflection point, it can be skewered---or adapt and emerge stronger than ever. A characteristic of a strategic inflection point is that industry insiders are initially bewildered; they k n o w their business model is not working as well as it once did, but they are not sure why. The S-curve illustration ( F i g u r e 1) depicts the process of technological displacement that was first advanced by Richard Foster (1986) of McKinsey & Company. In his words, S-curves show "the relationship b e t w e e n the effort put into improving a product or process and the resuits one gets back for that investment." The Scurve illustrates h o w a new technology is commercialized and gradually accepted by the market. For a while it has the marketplace to itself, until a competing technology is introduced. The two technologies coexist for a period of Figure 1 time before the older Creative Destruction at Work: one reaches its perforTechnology Life Cycles mance limits and can no longer compete. At that point the n e w technology has the market to itself, until it too is challenged. Once a c o m p a n y C has a product or technology ready to commercialize, the timing j~hnology B issue is instrumental. Just because the product is ready to bring to market does not J TeCnheT°/;gYeffoArt m e a n it should be. The three considerInvestment and Time ations that dictate
•j•chnology
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timing of the introduction are competition, customers, and profitability. As long as imitators have not brought clones to market, the technological leader can maintain its margins on its current product line. However, once lower-price clones begin to appear and take business away, the leader's profit margins will come under severe pressure. To strike a blow at the imitators, the leader then can attempt to commercialize the n e w technology and again establish a temporary m o n o p o l y position. Whether the leader is successful or not depends on customers' readiness to accept the n e w technology. In the early days of word processing, buyers were quick to adopt successive generations of software because the upgrades were so much easier to use. Later, as the industry matured, it became increasingly difficult to convince clientele that, say, Windows 98 was worth trading up to from Windows 95. On the other hand, a significant improvement, such as reliable voiceactivated word-processing software, would precipitate a massive wave of buying.
Creative Leveraging Co-Opts New Technology Executives in companies whose products are threatened by n e w technologies typically adopt one of two viewpoints, both of which invite trouble. They m a y be dismissive toward the rival and deny its potential. Reflect on the mimeograph firms that were not interested in what Chester Carlson, a patent lawyer and inventor, had to offer. His electrostatic process, eventually k n o w n as "xeroxing," b e c a m e to copying what the Gutenberg press was to printing. Incipient technologies are usually crude and do not work very well, which breeds complacency in the companies whose technologies contemporaneously rule the marketplace. The opposite reaction is for executives to see the worst in the situation and despair that all is lost and that the n e w technology will inevitably take over. In some instances, this "Chicken Little" conclusion, "The sky is falling," is well founded, such as with ice boxes, v a c u u m tubes, and propeller planes. However, displacement may not transpire at all. UPS and Federal Express were s u p p o s e d to be irreparably d a m a g e d by fax machines, electronic mail, and the lnternet. These inventions could all reduce time and distance to the click of an electronic mouse, delivering urgent messages forthwith, not the next day. Instead, online retailing b u o y e d the package delivery business. FedEx and UPS have b e e n so revitalized by the e-commerce b o o m that Wall Street has b e e n recommending them as inexpensive backdoor Internet plays. An investor can buy the stock of one of these proven firms, whose services and producBusiness Horizons / November-December 2000
tivity are dramatically a u g m e n t e d by the application of Internet technology, without incurring the risks of directly buying shares in a dotcom. Before executives in ostensibly at-risk companies give up and conclude that the n e w technology "will wipe us out," the strategic question to address is: "How can we leverage or co-opt the n e w technology to reinvent our business?" Dire predictions were made over the years for movie theaters, first with the white-hot diffusion of commercial television in the 1950s and afterwards with the immense popularity of videocassette recorders in the 1980s. Theater attendance and box-office revenues were indeed heavily d a m a g e d in the early days of television. Between 1950 and 1960, the percentage of homes owning a television set soared from 10 percent to 87 percent, while theater attendance p l u m m e t e d from more than 3 billion admissions to 1.3 billion. Gross receipts from box office sales declined from almost $1.4 billion to $984 million. Throughout the 1960s, movie attendance maintained a descending trajectory. By 1980, the n u m b e r of admissions had reversed course, although the 1980 total was still 66 percent below the attendance level for 1950. After 30-some years of television, Americans' fascination with it had subsided and people were again venturing outside their homes for entertainment. What's more, the motion picture industry, which had b e e n a m o n o p o l y in the days before television. had b e c o m e proficient in battling for business. As a result, between 1970 and 1999, movie theater attendance increased by 59 percent and box-office receipts more than quintupled. Unlike the early days of television, technical innovations such as VCRs, personal computers, and the Internet have had a catalytic effect on the entire movie industry. Theaters have b e e n able to enhance their admissions and revenues despite, as well as because of, new technologies. During the 1990s, U.S. box office revenues at theaters grew by almost 50 percent, theater attendance reached the highest level in 40-plus years, admissions per capita rose from 4.8 to 5.4, and the total n u m b e r of theater screens grew from 23,689 to 37,185. Sales of prerecorded rental videocassettes to dealers more than doubled and the industry boosted the n u m b e r of films it released annually by nearly 15 percent. The n u m b e r of people working in movie theaters increased by 28.6 percent and jobs in movie production grew by 79.6 percent. Employment in all sectors of the motion picture industry rose by more than 47 percent. History teaches that huge fortunes can originate from new technology, but application is at least as enriching, especially after a technology b e c o m e s a commodity. Henry Ford did not invent automobiles, but his mass-production technique made them affordable for the middle class. Creatively Managing for Creative Destruction
In the budding years of radio and television, RCA and NBC trailblazer David Sarnoff was infatuated with broadcasting technology, while CBS pioneer William Paley was more interested in content. Paley was right--a Milton Berle or a "Buffalo Bob" could provide a reason for people to watch and listen and develop viewer loyalty to a particular network. Currently there is a similar dichotomy between companies focusing on the technological aspects of communications and those supplying content, and the content providers occupy the more valuable long-term competitive position. Companies controlling the m o d u s operandi for communicating, such as cable-television lines and telephone access, are in an increasingly commodity-like business, whereas the most creative content providers have distinguishable attributes that separate them from the pack. To illustrate, in May 2000, w h e n Time Warner blacked out Disney-owned ABC stations from its cable television system over a contractual dispute, a hue and cry went up from viewers about missing the show "Who Wants to Be a Millionaire?" Ostensibly, cable television, telephone, and Internet services are competitors in terms of distributing content to consumers. They can also be viewed as complementary, which was the underlying strategy in the merger between America OnLine and Time Warner. The resulting communications giant will be able to supply customers with a bundled package encompassing cable TV, local and long-distance telephone service, and Internet access and content--all on one monthly bill. Seemingly substitute products or services are being merged to form a more attractive hybrid. Horse racing once vied with baseball as the most attended spectator sport in the United States. For years racing had a m o n o p o l y on legalized wagering, with the well-recognized exceptions of casinos in Las Vegas, greyhound racing, and jai alai in Florida. As almost the only legal play around, racetracks grew stodgy and unresponsive to their customers. When casino and riverboat gaming spread like wildfire across North America and state lotteries proliferated, racetracks were not honed to fight back. On-track attendance was also eroded by the legalization in numerous states of off-track betting (OTB) at a licensed facility, such as in a shopping center or a Vegas casino. Moreover, racetracks themselves instituted simulcasting, which refers to the practice of exchanging live telecasts of races a m o n g tracks. In simulcasting, the m o n e y wagered from all the tracks is commingled into a pool and the track originating a signal is c o m p e n s a t e d by the tracks receiving the signal. Every few minutes and at all times of the day and night, a bettor can play races run at tracks all over the United States as well as in foreign locations as far away as Australia and H o n g Kong. OTB and simulcasting 3
proffer more betting plays, a much wider array of times for busy people to participate, and a rhythm in sync with modern lifestyles. Electronic delivery systems revitalized betting on horse racing, with most tracks receiving 80 percent of their wagers from simulcasting. Technology extended racing's ability to distribute images and information and interact with customers. Recently, fans have been able to sign up to receive the satellite signals of two firms that broadcast racing most of the day and night. Bets can be made by phone using a toll-free number (known as "account wagering"), and past performance information is downloadable from the Net. The premier racetracks in New York, Kentucky, and California were delighted from the outset with what electronic technology could do for them, as their outgoing signals are the most popular imports at smaller tracks and OTB parlors. Initially, however, the lesser-known tracks and racehorse b r e e d e r s - - w h o have immense investments in farms and bloodstock--feared the worst: that the accumulated competition from state lotteries, casino gaming, OTB, simulcasting, and account wagering would lead to a shakeout among racetracks. What remained would be a small number of supertracks, perhaps fewer than ten, conducting live racing and beaming their signals to OTB facilities and homes. The denouement, the thinking went, would be a permanent downsizing in the huge agribusiness known collectively as the racing industry--sales companies, veterinarians, farms, and the like--because there would be a dramatic decline in the number of horses needed to fill the races. None of this eventuated. Technology has become racing's lifeline rather than its executioner. Ironically, this ancient sport has the requisite elements to be a twenty-first century kind of offering. As an action-oriented, information-based intangible, it is made to order for television and the Internet. On-track attendance has declined, but the total wagering handle has increased with each application of newly available electronic conveyance mechanisms. In the decade after simulcasting was implemented in a big way, on-track attendance and wagering on live races declined by 47 and 62.5 percent, respectively, whereas total revenues increased by 16 percent because of widespread betting on televised races. Of late, some major racetracks are even experiencing a
"Electronic enhancements have freshened and revived a centuries-old, zero-technology sport that many observers wrote off as moribund."
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shortage of horses to fill their races. Electronic enhancements have freshened and revived a centuries-old, zero-technology sport that many observers wrote off as moribund. The parallel between the predicament formerly faced by racetracks and the one now being encountered by higher education is remarkable, with distance learning being the equivalent of simulcasting. The fact is, any information-based business whose core content can be reduced to the digits 0 and 1 and directly transferred by any communication device based on a binary system is both vulnerable to new kinds of competition and blessed with expansive possibilities. Higher education is in the beginning stages of a digital revolution that is sure to reduce the need for conventional campuses with walled classrooms, dormitories, cafeterias, s p o t s facilities, and professors. Entirely online private sector schools are now enrolling students because of the convenience of distance learning and better prices-one proprietary university offers an accredited MBA for $11,000. Higher education cannot rely on its conventional business model of recruiting learners to campus. On the contrary, institutions will have to co-opt electronic technology and reach out to groups of students who might not ordinarily attend due to time and distance obstacles. Peter Drucker (20001) sees the biggest demand coming from adult education, declaring that "people who are already highly educated and high achievers increasingly sense that they are not keeping up." Traditional colleges and universities that move quickly to capitalize on the distance-learning trend will augment the size of their student populations, even though on-campus enrollments will likely decline.
Deciding Between Clicks and Bricks Accommodating new technologies does not mean abandoning traditional strategies. A segment of customers will prefer to browse for books in the relaxing ambience of a Border's store, while some will opt for the handiness of Internet ordering, and others will divide their shopping between online and in-house. The question of whether and how to combine electronic resources, or a "clicks" strategy, with a "bricks-and-mortar" strategy is one confronting almost every business and for which there is no pat answer. Dell Computer, Lands' End. and Blue Nile sell exclusively or mostly through catalogs and online, whereas the primary forte of Compaq Computer, Home Depot, and Tiffany & Company is retailing through actual stores. However, one fact has already emerged: It is unlikely that any commercial endeavor can be either fully virtual or solely bricks-and-mortar; Business Horizons / November-December 2000
some investment in both physical assets and electronic c o m m e r c e will be necessary. Online retailer eToys decided to bring its order fulfillment in-house by building its o w n warehouse instead of renewing its contract with Fingerhut Companies. Wal-Mart, the second largest seller of toys behind Toys 'R' Us, is moving in the other direction by becoming more of a virtual retailer. The c o m p a n y ' s thousands of store locations, coupled with its Web site, enable it to blanket the market and achieve even further buying p o w e r vis-a-vis toy manufacturers. Thus Wal-Mart is moving toward clicks as eToys is installing bricks.
Friendly Fire---Turning the Weaponry on Thyself Creatively leverag!ng new technologies to save a c o m p a n y or an industry is not always possible. In some cases--transistors versus vacuum tubes, automobiles versus carriages--it inescapably b e c o m e s a zero-sum game; what one wins, the other loses. Once m a n a g e m e n t determines that creative leveraging is not feasible, that two technologies cannot coexist in the marketplace and one will inevitably replace the other, then an option is to gain a foothold in the superior technology. The question is, how? Companies in entrenched industries generally react with indecision w h e n their product lines are threatened by new technologies. The customary response is to try and save themselves by pouring more m o n e y into the old product lines in a last-ditch effort to improve performance. But most of them also endeavor to gain a foothold in products and services based on new technologies. By ambivalently spreading their resources between the old and the new, they w e a k e n their competitive position. In most cases, the industries come to be dominated by firms from outside, with no ties to the past, whose single-minded attention, time. and m o n e y are focused on innovation. Successful companies are susceptible to what Harvard Business School professor Clayton Christensen calls "the innovator's dilemma." His 1997 b o o k by the same name is full of case studies of outstanding companies that faltered by listening too closely to current customers and concentrating their investments on today's most profitable products. Because current buyers are notoriously p o o r choices for evaluating radically different technologies, companies with a strong customer orientation are susceptible to allowing potential blockbusters to languish. This neglect enables ambitious firms without an allegiance to the status quo to exploit the w i n d o w of opportunity. IBM ceded control of the DOS operating system to Microsoft, claiming, "The hardware is where the value lies." DEC steadfastly claimed that personal computers would be of limited Creatively Managing for Creative Destruction
popularity: "Why would anyone want to have one at home?" A billion-dollar company---call it G o l i a t h - had long controlled a market for industrial equipment. A $3 million firm--David, of c o u r s e - - h a d pioneered machinery based on a much different technology and had m a n a g e d to sell 300 units to one of Goliath's major customers. Showing a bit of concern, Goliath contacted David about buying it out. As part of due diligence, engineers from Goliath did an in-depth technical evaluation of David's equipment, even though Goliath's CEO had previously told his counterpart at David that these engineers referred to the new technology as "the enemy." Not surprisingly, given their fidelity to their o w n technology, the tendentious engineers found an assortment of reasons why David's machinery was deficient. So Goliath broke off negotiations. Since then, backed with venture capital, David has b e e n making steady inroads and is headed toward having the dominant technology. "Not invented here" inculcates a bias that makes it difficult for anyone to realize that s o m e o n e else has found a better way, until it is too late to act. Kodak too has discovered it is psychologically and practically difficult for m a n a g e m e n t to take actions that amount to slaying the goose that laid the golden egg. The comp a n y has tried to hedge its bets by cultivating its film business and pursuing digital imaging. Its stock has b e e n a mediocre performer in a raging bull market, and several CEOs have failed to turn the c o m p a n y around. Even w h e n George Fisher was brought in from Motorola as the first outsider to head Kodak, the corporation remained rooted in the film culture that made it a household name, and Fisher departed with his task undone. Full-service stock brokerage firms like Merrill-Lynch are working to stave off the inroads made by low-cost e-brokers, but one wonders whether the Merrill-Lynch philosophy can coexist with the bare-bones mentality of the e-traders. Precedent would say no, that compromise produces a muddled strategy. Often, an organizational firewall needs to be constructed between the conflicting technologies. An outright divorce may be better yet, owing to the difficulties of blending disparate corporate cultures. Consider several examples. • When Wickes, Inc., a chain of lumberyards, launched Wickes.com, an Internet site that al33
lowed building contractors to get interactive price quotes and consult past purchase records, the conflict b e t w e e n the bricks-and-mortar side of the business and the Internet side b e c a m e so intense that the board of directors ordered a shutd o w n of the Internet effort. The young dotcom technical types w h o had b e e n brought in to start up and run the Internet operation and the older Wickes' m a n a g e m e n t cadre mixed like oil and water. Wiser for the experience, Wickes is n o w making another and apparently more fruitful effort to b e c o m e involved in e-business. • DaimlerChrysler started a venture unit to get the automobile c o m p a n y more involved in the World Wide Web. It immediately encountered a host of problems. The huge and far-flung automobile bureaucracy impedes the speedy action needed to act on Net-related investments. Further, the incentive-laden compensation packages necessary to attract and retain venture employees are quite different from the traditional reward structures in a manufacturing company. Similarly, General Electric has encountered noteworthy turnover in its venture unit that invests in Internet companies. The employees want to be compensated like their peers in venture capital firms, which is at odds with h o w GE pays everyone else. • Whenever possible, the idea is to use Internet technology to strengthen and reinvent an olde c o n o m y business rather than destroy it. However, w h e n the bricks-and-mortar and online c o m p o n e n t s of a business are so obviously substitutes for one another, a complete disjoining m a y be the best strategy. American Greetings k n o w s that online greeting-card purveyors can jeopardize the longtime practice in which customers go to retail outlets to purchase cards for special occasions. Consequently, the firm started an online unit as an entirely separate company, rather than a product line within the parent firm. J.P. Morgan pursued a kindred strategy by spinning off a Net-based risk m a n a g e m e n t company, called Cygnifi, in which it will retain a minority interest. • Arm's-length arrangements enable newtechnology managers to compete with old-technology executives in a no-holds-barred manner that is often unrealistic to expect within the confines of the same corporation. Proponents of the n e w technology n e e d to be free to proceed without regard for harming the old. Besides, by dividing the two organizationally, m a n a g e m e n t can offer investors a "pure play" in the n e w technology. General Motors opted to unlock the true value of its Hughes Electronics Corporation affiliate, a satellite communications unit, by issuing a tracking stock, GMH, w h o s e value depends on Hughes' earnings alone. Investors placed a market capitalization on GMH that exceeded the worth of GM's automobile business. Later, GM 34
spun off Hughes to stockholders, with GM keeping a 35 percent share. • When U.S. defense companies saw their markets shrink because of the fall of the Soviet Union and the Iron Curtain countries of Eastern Europe, m a n y tried to replace lost defense business with commercial endeavors. In general, the results of what is referred to as a "dual use" mission (defense and commercial) were disappointing because the defense firms had very little expertise in doing business with commercial buyers. Northrop G r u m m a n attributed its failed initiatives to a lack of understanding of buyer behavior and distribution channels in nondefense businesses. The Electronics Systems Sector of the Harris Corporation has circumvented these kinds of problems by identifying promising defense technologies for commercial applications, linking up with venture capitalist firms to underwrite startups, and then doing initial public offerings for the successes. Harris typically maintains a minority ownership, usually 20 percent, in the n e w companies.
A Virtual Certainty In the immediate future is a world of converging computers, telecommunications, and consumer electronics. Beyond this simple union lies the promise of a far-reaching development. Microsoft's Bill Gates (1999) sees the next step as universal connectivity, or what he calls "virtual convergence": Everything you want is in one place, but that place is wherever you want it to be .... The result is that there will be a proliferation of smart devices, from palmsized and tablet PCs to Web-enabled phones and AutoPCs. Your files, schedule, address book, and everything else will automatically be replicated onto each of these devices, because everything that can think will link. Smart devices will help the user avoid information overload by supplying only data that are pertinent at a particular time. If you are at your CPA's office, your tax records will be available; if you are at a major-league baseball game, relevant statistics will be front and center. Gates foresees that the combination of digital technology, advanced software, smaller and more powerful microprocessors, and exponential growth in fiber and wireless bandwidth will ultimately provide universal connectivity. A person's whereabouts will be less important than they are today. Virtual convergence will m e a n that digital information is at one's fingertips anytime and anyplace. Take day trading. Twenty-four hours a Business Horizons / November-December 2000
day, seven days a week, and from anywhere, a day trader will be able to access details about securities and initiate orders. Once virtual convergence becomes a reality, the market potential for any intangible such as information will be greatly expanded, and sellers of tangible goods will be able to communicate with and service their customers as never before. Ford, for example, has hired UPS to provide real-time tracking of its cars, via bar codes and the Internet, as they proceed from factories to dealerships. ike the proverbial two-edged sword, the virtual revolution will sound the death knell for some companies and industries while presenting unimaginable growth opportunities Io others. The overriding issue facing upper management in threatened companies is h o w to leverage creative destruction---creatively--to renew commercial offerings that have lost their competitive edge. Executives w h o absolutely cannot find ways must boldly change their own companies if they hope to survive and prosper. Only by zealously replacing passe product lines and outdated processes can they save the c o m p a n y for shareholders. In the vast majority of cases, the place to start is with the establishment of an independent company. As long as conflicting lines of business are within the control of the same corporate structure, the human tendency will be to pull punches rather than administer a knockout blow.
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References
J. Ball, "DaimlerChrysler Hires a Silicon Valley Gadfly to Map Its Web Drive," Wall Street Journal, April 27, 2000. p. B1. D. Blackmon, "In the New Economy, Who Are the Hunters and Who the Hunted?" Wall Street Journal, April 12, 2000, p. A1. C. Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997).
Creatively Managing for Creative Destruction
A. Cooper and D. Schendel, "Strategic Responses to Technological Threats," Business Horizons, February 1976, pp. 61-69. H. Curtis, Pari-Mutuel Indust~.. Slots and Racing--Industry Report (New York: Salomon Smith Barney, 1997). P. Drucker, "Putting More Now Into Knowledge," Forbes, May 15, 2000, pp. 84-88. R. Foster, Innovation: The Attacker's Advantage (New York: Summit Books, 1986). B. Gates, "Everyone, Anytime, Anywhere," Forbes
ASAE October 4, 1999, p. 45. A. Grove, Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company and Career (New York: Bantam Doubleday Dell Publications, 1996). G.C. Hill and L. Landro, "Does Everybody Have to Own Everything?" Wall Street Journal, January 12, 2000, p. B1. Motion Picture Association of America Research Department, MPAA 1999 U.S. Economic Review (Encino, CA: MPAA, 2000). M. Neff and W. Shanklin, "Creative Destruction as a Market Strategy," Research Technology, Management, May-June 1997, pp. 33-40. W. Shanklin, "Revitalization Strategies for Second-Tier Defense Companies," in G. Susman and S. O'Keefe (eds.), The Defense lndustry in the Post-Cold War Era: Corporate Strategies and Policy Perspectives (New ~k~rk: Pergamon, 1998), pp. 189-202.
William L. Shanklin is a professor of mar-
keting and entrepreneurship at Kent State University in Kent, Ohio.
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